Answer to Question #256454 in Macroeconomics for JDN

Question

Extract C (lines 5–6) states ‘Some economists believe that a reduction in the level of economic activity and an increase in unemployment are inevitable.’ Use the extracts and your knowledge of economics to assess the view that when an economy experiences a negative economic shock there will always be a sustained increase in unemployment.

Answer 1

Declining economic activity is characterized by falling output and employment levels as the level of productivity declines significantly. Unemployment level increase inevitably because during economic contraction, demand decreases and businesses lose profits. To increase or retain original profit levels, businesses tries to cut costs and mainly by laying off workers, which would be generating higher levels of unemployment.

Thus, when an economy experiences a negative economic shock there is a sustained increase in unemployment level.

 

In 2007, after bursting pf US housing bubble, the U.S. economy experienced extreme economic downturn and global financial crisis from 2007 to 2009 known as The Great Recession. It was one of the most severe economic recession in the United States since 1930s.

 

At this period of time the unemployment rate which was 5.0 percent before economic crisis reached 9.5% at the end of recession and even in the months after the recession, the unemployment rate peaked at 10 %.